When to use:
Call
options give the buyer the right to
buy the underlying stock at a
specified price on or before a specified date (expiry date) when you think the market
is very bullish you have to buy a call option. In general, the more
out-of-the-money calls, the more bullish the strategy.
Long
call strategy is buying the Call Option only. Any investor who buys the Call
Option will be bullish in nature and he would be expecting the market to give
decent returns in future. An options trader buy call options with the belief
that the price of call option will rise significantly beyond the strike price
before the option expiration date.
This
is one of the basic strategies and it is most basic option strategy. A long
call option is the simplest way to benefit if you believe that the market will
make an upward move and is the most common choice among first time investors.
As
a buyer of call options, you are hoping for the value of the underlying stock
to rise. An increase in the price of the underlying stock will result in an
increase in the value of your options.
The
seller of call options receives a premium for taking on the obligation to sell
the underlying stock to the buyer of the options at the strike price if the
buyer decides to exercise the option before expiry. If the buyer exercises the
option, the seller must sell the underlying stock to the buyer at the strike
Price.
If the buyer does not exercise the option, the seller simply retains the
premium and the obligation expires with the option on the expiry date.
Risk:
The
risk of the buyer is the amount paid by him to buy the Call Option i.e. the
premium value. Your risk is limited on the downside if the market makes a
correction. Risk for the long call options strategy is limited to the price
paid for the call option no matter how low the stock price is trading on
expiration date. Loss limited to amount paid for option. Maximum loss realized
if market ends below option exercise A.
Profit:
The Profit will be unlimited as the underlying
asset value can rise up to any value until the expiry. Since they can be no
limit as to how high the stock price can be at expiration date, there is no
limit to the maximum profit possible when implementing the long call option
strategy.
Profit
increases as market rises.
Example:
Currently
Nifty is trading around 8900 levels, and if you think the current
level is bullish for Nifty and buys one 8900 Call Option (ITM) for Rs. 200
premium. Lot size is 25. The investment amount
will be Rs. 5000. (200*25)
Case
1: NIFTY closes at 9200 levels you will make a profit of Rs. 2500. [(300-200)*25]
Case
2: NIFTY dips to 8900 levels you will incur a loss of Rs. 5000 (200*25) which
is the premium you paid for buying one lot of 8900 Call Option.
